commerce and industries department - karnatakachitradurga district. ... commerce and industries...

Commerce and Industries

Development of KSSIDC Land

Pre

CRISIL Risk and Infrastructure Solutions Lim

Commerce and Industries Department

Development of KSSIDC Land Parcel

Pre-feasibility report

May 2012

CRISIL Risk and Infrastructure Solutions Limited

[ii]

Abbreviations

Acronym Definition

BARC Bhabha Atomic Research Centre

BOO Build Operate Own

CRIS CRISIL Risk and Infrastructure Solutions Limited

DBFOT Design Build Finance Operate Transfer

DIC District Industries Centre

DIPP Department of Industrial Policy and Promotion

DRDO Defence Research and Development Organization

EIA Environmental Impact Assessment

GDP Gross Domestic Product

IISc Indian Institute of Science

IRR Internal Rate of Return

ISRO Indian Space Research Organization

ITES Information Technology Enabled Services

KHB Karnataka Housing Board

KSSIDC Karnataka State Small Industries Development Corporation

MSME Micro, Small and Medium Enterprises

PPP Public-Private Partnership

PSP Private Sector Partner

RFP Request for Proposal

SHLCC State High Level Clearance Committee

SIA Social Impact Assessment

SLSWCC State Level Single Window Clearance Committee

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Acronym Definition

SPC Special Purpose Company

SPV Special Purpose Vehicle

SSI Small Scale Industry

VGF Viability Gap Funding

WACC Weighted Average Cost of Capital

[iv]

Contents

1. Executive Summary ........................................................................................................................ 1

2. Introduction ..................................................................................................................................... 3

2.1 Project idea ............................................................................................................................. 3

2.2 Approach and methodology .................................................................................................... 3

2.3 Review of previous studies ..................................................................................................... 4

3. Sector profile ................................................................................................................................... 5

3.1 Commerce and Industries Department ................................................................................... 5

3.2 Karnataka Small Scale Industries Corporation ....................................................................... 5

3.3 Industry outlook ....................................................................................................................... 5

3.4 Key issues ............................................................................................................................... 6

4. Project ............................................................................................................................................. 7

4.1 Description of the project ........................................................................................................ 7

4.2 Components of the project ...................................................................................................... 7

4.3 Description of the site .............................................................................................................. 7

4.4 Connectivity ............................................................................................................................. 8

4.5 Economic profile and regional strengths ................................................................................. 8

4.5.1 Industrial scenario ...................................................................................................... 8

4.6 Development needs, public needs, and planning considerations ......................................... 10

4.7 Best case studies for similar projects in India/world ............................................................. 10

4.7.1 The Tefen model ...................................................................................................... 10

5. Market Assessment ...................................................................................................................... 12

5.1 Industry sector in Karnataka ................................................................................................. 12

5.2 Opportunities and demand projections ................................................................................. 12

5.3 Potentially low demand in Chitradurga ................................................................................. 13

6. Project financials ........................................................................................................................... 15

6.1 Cost estimation...................................................................................................................... 15

6.2 Revenue streams .................................................................................................................. 15

6.3 Viability assessment .............................................................................................................. 16

6.4 Funding available under various schemes ............................................................................ 17

6.5 Issues for KSSIDC’s consideration ....................................................................................... 17

6.6 Discussions on the report ...................................................................................................... 17

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7. Regulatory and Legal Framework ................................................................................................. 18

7.1 Applicable laws and acts and legal cover for the project ...................................................... 18

7.2 Legal and regulatory framework............................................................................................ 18

7.3 Key issues ............................................................................................................................. 18

8. Indicative Environmental and Social Impacts ............................................................................... 19

8.1 Environmental impacts .......................................................................................................... 19

8.2 Social impacts ....................................................................................................................... 19

8.3 Mitigation measures .............................................................................................................. 19

9. Operating Framework ................................................................................................................... 20

9.1 Risks and mitigation .............................................................................................................. 20

9.2 Indicative project structure .................................................................................................... 21

9.2.1 Key issues in project structuring .............................................................................. 21

9.2.2 Recommended project structure.............................................................................. 24

10. Way Ahead ........................................................................................................................... 25

10.1 Project development framework............................................................................................ 25

10.2 Procurement plan .................................................................................................................. 26

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List of Figures

Figure 4-1: Wind farms in Chitradurga .................................................................................................... 8

Figure 9-1: Recommended structure for the industrial estate ............................................................... 24

Figure 10-1: Project development framework for KSSIDC industrial estate ......................................... 25

Commerce and Industries Department, Government of Karnataka

[1]

1. Executive Summary

Karnataka is at the forefront of industrialization in the country. Today, the state is one of the most

attractive locations for future investments. In order to consolidate its leadership position, Karnataka

now intends to provide a major thrust to infrastructure development through increased public-private

partnerships (PPP). In pursuance of this objective, CRISIL Risk and Infrastructure Solutions Limited

has been mandated to work closely with the Commerce and Industries Department in identifying and

mainstreaming PPP projects. The Commerce and Industries Department has identified five priority

projects, one of which is the development of a 50-acre land parcel owned by the Karnataka State

Small Industries Development Corporation (KSSIDC) at Khudapura village in Chellekere taluk,

Chitradurga district.

The KSSIDC intends to develop an industrial estate through the public private partnership model. A

pre-feasibility for the proposed project has been carried out and is presented in this report.

The land parcel is located approximately 15 km away from Chellekere town, which is approximately

30 km from Chitradurga. It is spread over 50 acres and is in the possession of KSSIDC. The site is

adjacent to land parcels proposed to be developed by Indian Space Research Organization (ISRO),

Defence Research and Development Organization (DRDO), Indian Institute of Science (IISc) and

Bhabha Atomic Research Centre (BARC). The Chellekere taluk has a pre-dominantly agrarian

economy. The region is well-known as an oild producing region and is ranked second in the country in

terms of oil production. The industrial development in the region is very low with only a handful of

large and medium scale industries operating. There are no large industrial areas developed in the

region, KSSIDC is the only agency who has developed industrial estate spread over only 32.5 acres

of land.

It is anticipated that the industrial demand for the region will be low except for defence manufacturing

which will be buoyed by the developments proposed by ISRO, DRDO, IISc and BARC. Hence, it is

recommended that the KSSIDC should develop the industrial estate as an ancillary hub for defence

manufacturing or ancillaries that support the aforementioned organizations.

The proposed industrial area should house the following facilities:

� Industrial sheds, industrial plots

� Trunk and internal roads

� Drainage and sewerage facilities

� Water treatment and distribution facilities

� Power substation and distribution

� Solid waste and liquid effluent management facilities

� Data and telecom facilities

The report examines the possibility of developing such infrastructure on a public private partnership

basis. The financial viability has been depicted as only a demonstration that industrial infrastructure

development is possible and can be made viable for the private sector if the project is structured well.

The financial analysis reveals that on a standalone basis the project may not be a viable under the

typical Design, Build, Finance, Operate and Transfer (DBFOT) model. However, the project can be

made viable by accessing the Centre and State viability gap funding (VGF) mechanism.

The proposed project structure has been developed from a bottom up approach with due

consideration for all concerns of the participating stakeholders. We have analysed the concerns that


[2]

each of the stakeholders are likely to have and based on this analysis the project structure has been

derived.

It is proposed that the project would be developed through a Special Purpose Company wherein 74%

of the equity will be brought in by the developer and 26% of the equity will be brought in by KSSIDC in

the form of land. The land will be transferred to the SPC who will then take up the development of the

land. The KSSIDC will be able to gain a revenue share from the profits that the SPC will make.

The report also examines the way forward for the project. The first step will be to appoint a transaction

advisor to conduct detailed feasibility for the industrial estate. The transaction advisor will also prepare

the bid documents for the appointment of private sector player for developing the area.

The procurement plan proposes that the appointment of the transaction advisor can be accomplished

within a span of 7 to 8 weeks.


[3]

2. Introduction

The growth of small-scale industries in our country since independence is rightly regarded as one of

the most significant features of planned economic development. The very concept of small-scale

industries, as we know, was not in vogue at the eve of independence. Rural and cottage industries,

which constituted the indigenous sector of industries, were wide spread throughout the length and

breadth of our country. Various programmes to sustain, modernise, and further develop this group of

industries were initiated soon after the independence, and the modern small-scale industry scheme

has gradually emerged out of this programme.

The small-scale industries have provided opportunities for self-employment to educated youth and

experienced technicians from the middle level of society and contributed to the growth of industrial

entrepreneurship in our country. Today, small-scale industries are regarded as a power tool for

balanced regional economic development. These achievements are primarily due to the dynamic

enterprising spirit of the small-scale industrialists themselves.

A positive programme for assistance to small-scale industries was initiated towards the end of 1954

on the basis of a suggestion made by the international planning team sponsored by the Ford

Foundation at the request of Government of India. Further, on the basis of the recommendations of

the Central Small Scale Industries Advisory Board, the state-level organisations have been set up in

all states to assist the small-scale industries for procurement of scarce raw materials, establishment of

industrial estates, etc.

KSSIDC, one such corporation, was established on 29th April 1960. The registered office of the

company started functioning at Bangalore in the state of Karnataka. The company framed a

comprehensive and well-defined memorandum of association and articles of association, which permit

the corporation to take up any activity aimed at the rapid development of small-scale industries,

subject to the guidelines issued by the government from time to time.

2.1 Project idea

KSSIDC typically develops the industrial layouts/estates on its own and allocates the same to

prospective entrepreneurs. The entire investment in infrastructure is made by KSSIDC mostly through

the engineering, procurement, and construction route.

KSSIDC wants to explore if an industrial layout/estate can be developed through the PPP

mechanism.

For the purpose of this assessment, we have assumed that the PPP model to be adopted will be

based on a design, build, finance, operate, and transfer (DBFOT) model.

2.2 Approach and methodology

The approach and methodology adopted for the development of this concept note has been outlined

in the diagram below.


2.3 Review of previous studies

Since no previous reports were

the current process of industrial estate development and management. The discussion

the current mode of industrial estate development, the potential costs of such development, the

different configurations under which industrial estates are developed

allotted.

Discussion with KSSIDC


Review of previous studies

were available, we held discussions with KSSIDC officials to understand

ess of industrial estate development and management. The discussion


different configurations under which industrial estates are developed, and the price at which these are

Secondary data collection and policy review

Site visits and data collection

development framework

Pre-feasibility report

[4]

available, we held discussions with KSSIDC officials to understand

ess of industrial estate development and management. The discussions centred on


rice at which these are

Site visits and data collection

Project development framework


[5]

3. Sector profile

3.1 Commerce and Industries Department

The Commerce and Industries Department acts as a catalyst for the overall development of the

industrial sector through effective discharge of developmental and facilitation roles. With a view to

promote investment and trade, the department formulates and implements the policies of the state.

Identification of sectoral advantages of the state and human resource development for sustainable

and growth-oriented industrialization have been the crucial functions of the department. Facilitating

the launching of infrastructure projects that boost industrial growth has been the department’s forte.

The department helps enhance the competitiveness of domestic industry through modernization,

technology up-gradation, and adoption of best practices. It also provides a forum for entrepreneurs

and industrialists through their associations to represent their needs to the government, which

translates into policies of the state.

Some of the crucial infrastructure projects facilitated by the department include growth centres across

the state, export promotion industrial parks, International Technology Park Ltd., electronic city, food

and agro-technology parks, agro export zones, special economic zones, Bengaluru International

Airport, etc.

The department has established the single window mechanism for faster, single-point clearance for

projects seeking infrastructure facilities/incentives/concessions and assistance in establishing

industries and businesses in Karnataka. Karnataka Udyog Mitra is the nodal agency under the single

window setup.

KSSIDC is a part of the Commerce and Industries Department.

3.2 Karnataka Small Scale Industries Corporation

KSSIDC was established on 29th April 1960. The registered office of the company started functioning

at Bangalore in the state of Karnataka. The company framed a comprehensive and well-defined

memorandum of association and articles of association, which permit the corporation to take up any

activity aimed at the rapid development of small-scale industries, subject to the guidelines issued by

the government from time to time.

KSSIDC not only develops industrial infrastructure for small-scale industries but also supports these

industries through raw material support.

3.3 Industry outlook

Karnataka is considered as one of the most desired destinations for industrial investments in the

country. The state has been able to adapt to the continually changing investment climate and has

been well prepared to meet the needs of the investors. Karnataka is also home to large public sector

industrial undertakings and large privately owned industries like steel sugar and textiles. In the recent

times, Karnataka has emerged as the leader in IT & BT and the knowledge-based industrial sector,

making rapid strides in IT and computer related industries and biotechnology with a strong research


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and development base. The state has a number of traditional cottage and handicraft industries, micro

enterprises like handlooms, power looms, silk weavers, khadi and village industries, etc.

Over the last 3 years, KSSIDC has consistently recorded profits. KSSIDC made a net profit of Rs.

12.47 crores in the year 2008-09. KSSIDC has also turned in an average of 100% performance on

raw material purchase and distribution over the last 5 years or so.

Since its inception, KSSIDC has acquired 2828.61 acres of land both through KIADB and through

other government agencies. Details regarding KSSIDC developed industrial estates and facilities are

given below.

Description Figures in Nos.

Number of Industrial Estates 164

Number of Industrial Sheds Constructed 5757

Number of Industrial Plots Formed 6301

Numbers of Godowns Constructed 233

Number of Vishwa Sheds Constructed 806

Thus, KSSIDC has been playing a pivotal role in promoting the development of small-scale industries

in the state.

3.4 Key issues

Thus far, KSSIDC has attempted PPP projects in a very limited manner. The institutional capacity and

preparedness for managing projects under the PPP mode is, at best, limited. Capacity building to

successfully develop and manage PPP projects is a critical area that KSSIDC should focus upon.


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ISRO

IISC

KHB

4. Project

4.1 Description of the project

The proposed project envisages developing an industrial estate in Chitradurga district spread over an

area of 50 acres. The project will provide an ideal environment for investments with serviced land

being made available to potential investors willing to set up facilities.

4.2 Components of the project

The project will include the following components:

� Industrial sheds, industrial plots

� Trunk and internal roads

� Drainage and sewerage facilities

� Water treatment and distribution facilities

� Power substation and distribution

� Solid waste and liquid effluent management facilities

� Data and telecom facilities

4.3 Description of the site

Chellekere is located at a distance of 200 km from Bangalore.

It is known as the ‘oil city’ of Karnataka and is India's second

largest producer/supplier of edible oil after Mumbai. There are

more than 60 oil industries in Chellekere. Several other

industries like dal, fried gram, rice etc. are also present. Indian

Space Research Organization (ISRO), Defence Research and

Development Organization (DRDO), Indian Institute of Science

(IISc), and Bhabha Atomic Research Centre (BARC) are

developing facilities in the Chellekere taluk. The proposed

developments will create India's largest science and research

hubs.

The site for the proposed project is spread over 50 acres of

land and is located in close proximity to the land allotted to

ISRO (adjoining land parcel spread over 100 acres), BARC

(400 acres), DRDO (200 acres), and IISc (1500 acres), as

depicted in the map.

The site is situated

217 km from

Bangalore, on State

Highway 45 (SH 45),

and is a mere 15 km

from the national

highway.


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Figure 4-1: Wind farms in Chitradurga

4.4 Connectivity

� Road: The district has 166 km of national highway (NH), 486.40 km of state highway (SH),

and 887 km of major district roads. NH 4 and NH 13 pass through the district.

� Rail: The total broad gauge railway route length is 165.27 km in the district. The district is

connected to Arsikere and from there, on to Bangalore, Mumbai, and Mysore.

� Port: Mangalore Port, the nearest port to the district, is situated at a distance of 300 km.

Other accessible ports are the ones at Goa and Karwar at a distance of 600 km.

� Airport: The nearest airport is Bengaluru International Airport, situated at a distance of 200

km. Mangalore airport is located at a distance of 296 km.

4.5 Economic profile and regional strengths

Agriculture is the main occupation of the people in Chitradurga district. Out of the total workforce in

the district, about 72% are cultivators and agricultural labourers. Agriculture including animal

husbandry accounts for about 35% of the district income. The total geographical area is 7.71 lakh

hectares and the net cultivable area is 4.18 lakh

hectares, of which only 0.65 lakh hectare (15%)

area is irrigated. Further, 85% of the area is

irrigated by bore wells. Therefore, rain-fed

agriculture is predominant in Chitradurga district.

Chitradurga is home to one of country’s best

performing wind farms. These wind farms recorded

a capacity factor of 38.5%, the highest in India.

Horticultural produce processing is a prominent

industry in the district. There is a huge scope for

spice processing industry as well as jam/jelly and

juice segments.

4.5.1 Industrial scenario

There are 13 large and medium industries in the district with an investment of Rs. 398.73 crores.

Further, the district has 167 factories. The industries include 1 gold mine, 3 textile industries, 7 edible

oil industries, 1 power industry, and 1 cement industry. There are 9,886 small-scale industries with an

investment of Rs. 1,74,433 lakhs, providing employment to 40,071 persons. There are three industrial

estates, one each in Chitradurga, Hosadurga, and Hiriyur. There is one industrial area at Kelagote

extension on 85.93 acre land. Of the 85.93 acres, 70.87 acres of land has been developed. Focus

sectors include natural fibre and food processing, wind energy, handloom and power loom, and

cement.

Only KSSIDC has developed industrial estates within the district. The overall industrial development in

the district is very low. As is evident from the table below, so far, only 32 acres of land has been

developed for industrial purposes.


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Table 4-1: Facilities developed by KSSIDC in Chitradurga district

Taluks

Total extent of

land acquired in

acres

No. of sheds

constructed

Sheds

allotted

Plots

developed

Plots

allotted

Plots

vacant

Chitradurga 10.00 36 36 17 16 1

Hosadurga 9.36 16 16 50 50 0

Hiriyur 13.14 8 8 67 47 20

Molakalmur

0

Chellekere

0

Holalekere

0

Total 32.50 60 60 134 113 21

Source: KSSIDC

According to the officials of the District Industries Centre (DIC), IISc, ISRO, DRDO, and BARC plan to

develop various facilities adjacent to the proposed site. An integrated township of all these institutions

is also proposed to be developed in the proximity of the site.

It is estimated that all of these facilities would be developed over approximately 8,000 acres of land

adjoining the proposed project site.

Institution Area (in acres) Facilities

IISc 1,500 Laboratories, specialized research centres, hostels

ISRO 473 Communication and remote sensing facilities

DRDO 4,290 Extensive aeronautical testing range

BARC 1,810 Material enrichment facility

Total 8,073

The Karnataka Housing Board (KHB) has also initiated development of land right across the project

site.


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4.6 Development needs, public needs, and planning

considerations

The micro, small, and medium enterprises (MSME) sector has received a lot of attention from both the

central as well as state governments since this sector is perceived to become an engine of growth for

the economy. Development of MSMEs also ensures that jobs are created locally and that the

multiplier effect also creates employment outside of the MSME units.

The MSME sub-group is an important component of the Indian industry, contributing about 45% of its

manufactured output and 40% of the manufacturing exports. The state accounts for 7% of the MSMEs

in the country and ranks only next to Uttar Pradesh (12%), Tamil Nadu (11%), Maharashtra (9%), and

West Bengal (9%).

The Industrial Policy, 2009-14, of the Karnataka state envisages development of MSMEs as a key

component for the industrial development of the state. The vast resource pool available with

Karnataka will need employment opportunities since all the resources cannot be absorbed in the IT

and services sector.

4.7 Best case studies for similar projects in India/world

Since there are no direct case studies, we have chosen to discuss a case study of an integrated

industrial township model.

4.7.1 The Tefen model

Atop a rocky hillside in the northern Galilee region of Israel, industrial workers each produce over

$150,000 a year for export. Together they account for over 10% of Israel’s industrial exports and

yearly sales of one and a half billion dollars. This is Tefen, populated by less than 1% of the Israeli

population.

Tefen is the site of the first model industrial park developed by the industrialist Stef Wertheimer,

replicated at three other locations in Israel with four additional projects planned, both in Israel and

overseas. At the outset, these projects promoted Stef Wertheimer's vision of the development of

Israel towards a goal of economic independence and stability. Today, the model is expanding in

pursuit of a broader vision for economic independence for Israel and its neighbours, regional stability,

and peace.


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Up until the mid-1980s, Tefen was a barren hilltop grazed by local goat herds. Today, the scope of

industrial exports manufactured at Tefen equals that of the entire Jerusalem area. The four Tefen

model industrial parks have, to date, given rise to more than 160 industrial enterprises, with export

rates typically associated with industrial powerhouses such as the United States, Western Europe,

and Japan.

The industrial parks were established with the goal of creating a supportive, quality environment to

nurture the development of export-orientated economic activity. All the parks in Israel are unique in

that they integrate a high level of aesthetics and business services with art, culture, and educational

facilities of international standards. An industrial park is a supportive business incubator that enables

entrepreneurs, at the early stages of business development, to focus their efforts on their major

concerns, namely manufacturing and marketing of their products.

The model is based on the synergy of complementary factors of development: advanced export

industry, education and technological training, cultural enrichment, high living standards for workers

and their families, and peaceful coexistence. The simultaneous pursuit of all the development factors

provides a collective impact, far greater than the sum of individual initiatives.

The synergy generated by the model sets the industrial parks apart from other industrial initiatives in

Israel and abroad, through their creation of an entirely new type of industrial-social-cultural entity. The

model, which recognizes the importance of a sophisticated work environment together with the

possibility of a high quality of life, has been exceptionally successful in attracting highly productive

industries and a high-quality workforce to remote and developing areas.


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5. Market Assessment

5.1 Industry sector in Karnataka

Karnataka is considered a pioneer in the field of industrialization in India. The state has been in the

forefront of industrial growth of our country since independence. In the era of economic liberalization

since 1991, the state has been spearheading the growth of Indian industry, particularly in terms of

high-technology industries such as electrical and electronics industries, information and

communication technology (ICT) industries, biotechnology industries, and more recently, in terms of

nanotechnology industries.

The highlights of Karnataka’s industrial growth performance are as follows:

• The annual survey of industries (ASI) figures indicate that Karnataka accounted for 5.53% of

the total registered factories in the country, 7.10% of the fixed capital investment, and 7.23%

of the total gross value added by the registered factories in the country.

• Karnataka compared favourably to All-India in terms of labour productivity, input per worker,

output per worker, and wages per worker during 2005-06 to 2007-08.

• Karnataka accounted for 5.64% of the total number of unorganized manufacturing enterprises

and 5.42% of the total unorganized manufacturing employment in the country in 2005-06. In

terms of gross value added per enterprise as well as per worker, Karnataka performed better

than All-India and stood fourth among the states of India.

• Under service sector, Karnataka accounted for 4.9% of the total enterprises and 4.8% of the

total enterprise workers in the country. In terms of both gross value added per enterprise and

gross value added per worker, Karnataka stood first in the country.

• Karnataka has registered more than 12,000 MSMEs and generated employment for more

than 75,000 persons during April-December 2010.

• Karnataka is making rapid strides in terms of important industry sectors such as food

processing industries, textiles, sericulture, and information technology and biotechnology

industries.

• Karnataka has been making impressive progress in e-governance. Its e-procurement project

won the ‘2010 FutureGov Award for Best Business Practices in Asia’s Public Sector’ for the

year 2010.

• The growing number of SEZs presents another dimension of Karnataka’s industrialization.

This is however skewed towards IT/ITES sectors.

• Karnataka is an industrially peaceful state and therefore has a salubrious industrial climate.

Naturally, therefore, according to the Investment Assessment Report of ASSOCHAM,

Karnataka is the most favoured investment destination in the country today.

5.2 Opportunities and demand projections

There are limited reference points available to outline the demand projections for the industrial sector.

However, several references are available to the manner in which the industrial growth of the nation

should span out. These have been described both in the Planning Commission’s ‘Approach Paper to

the 12th Five Year Plan’ as well as the National Manufacturing Policy floated by the Department of

Industrial Policy and Promotion (DIPP).

Planning Commission’s approach paper observes that though the Eleventh Plan targeted growth in

manufacturing at 10.0-11.0%, actual performance is estimated to be only about 7.7%. It is a matter of

concern that the manufacturing sector has not shared the dynamism of the economy not just in the


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Eleventh Plan but also in the preceding Plan periods. As a result, the share of the manufacturing

sector in GDP is only 15.0% in India, compared with 34.0% in China and 40.0% in Thailand. It further

observes that the manufacturing sector must provide a large portion of the additional employment

opportunities as opposed to agriculture for India’s increasing number of youth. On the contrary it

should be releasing labour which has very low productivity in agriculture to be absorbed in other

sectors. While the services sector has been growing fast, it alone cannot absorb the 250 million

additional income seekers who are expected to join the workforce in the next 15 years. Unless

manufacturing becomes an engine of growth, providing at least 100 million additional decent jobs, it

will be difficult for India’s growth to be inclusive.

In order to further the manufacturing sector growth, the Planning Commission has recommended the

following strategic objectives for changing the manufacturing sector in the next 15 years:

• Increase manufacturing sector growth to 12.0–14.0% over the medium term to make it the

engine of growth for the economy. The 2.0-4.0% differential over the medium-term growth

rate of the overall economy will enable manufacturing to contribute at least 25.0% of GDP by

2025.

• Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2025

• Put emphasis on the creation of appropriate skill sets among the rural migrant and urban poor

to make growth inclusive

• Increase domestic value addition and technological ‘depth’ in manufacturing

• Enhance global competitiveness of Indian manufacturing through appropriate policy support

• Ensure sustainability of growth, particularly with regard to the environment

The Karnataka Industrial Policy, 2009-14, also emphasizes on promoting industrial development. The

mission statement of the policy is as follows:

• To create enabling environment for robust industrial growth

• To ensure inclusive industrial development in the state

• To provide additional employment for about 10 lakh persons by 2014

• To enhance the contribution of the manufacturing sector to the state’s GDP from the current

level of 17% to 20% by the end of the policy period

Thus, it is amply clear that the industrial sector will receive significant push in the future from both the

central government as well as the state government. It is expected that the Indian economy will reach

the US $ 6 trillion mark by the year 2020. In order to aid the achievement of this size of GDP, the key

growth drivers will be industry and services. Industry is expected to increase its share in the GDP from

the current 15% to over 25% by 2020.

5.3 Potentially low demand in Chitradurga

Chitradurga is predominantly an agrarian economy. KSSIDC has so far developed only 32.5 acres of

land for industrial purposes across the district. There are only a handful of large and medium-scale

industries operating in the district. Small-scale industries are also very limited in the district.

According to the figures available from the Joint Director, DIC, there are 518 registered units in

Chitradurga with a total investment of a little over Rs. 33.16 crores. These units provide employment

to 2,483 persons. This shows that industrial investment demand is very limited in the district.

The upcoming developments proposed by the IISc, DRDO, ISRO, and BARC will likely spur investor

interest, but this will in all possibility be limited to the defence manufacturing space where ancillaries

will likely be set up around the proposed facilities of these agencies.


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Industrial investments apart from these are expected to be very limited in Chitradurga.


[15]

6. Project financials

The project financials have been worked out based on ASSUMPTIONS only. The actual working of

financials for the proposed project will depend on several components, viz. land use plan, water

requirements, common effluent treatment plant requirements, and all other infrastructure components.

It is recommended that a detailed feasibility be carried out for the project.

6.1 Cost estimation

The cost estimates have been worked out based on thumb-rule estimates and our experience of

undertaking cost and financial analysis for other similar parks. The total estimated cost of developing

all infrastructure and facilities within the area would be approximately Rs. 2,47,800 lakhs or Rs. 2,478

crores. The overall cost estimate outlined below is for illustration purpose only.

Table 6-1: Cost estimates for industrial estate

Project component Project cost

(Rs. lakhs)

Loading

(Rs. lakhs)

Total

(Rs. lakhs)

Roads 473 382 855

Water Supply 569 460 1,029

Strom Water Drains 62 50 113

Underground Electric Cables 108 87 196

Underground Telephone Cables 12 10 21

Casing Pipes for Cables for Road Crossing 5 4 8

Effluent Drainage 30 25 55

Initial Costs 362 293 655

Buildings 357 289 645

Residential Complex - - -

Total 1978 1600 3,577

The cost estimates are only for demonstration purposes and may vary depending on the plan for the

site and facilities at the site.

6.2 Revenue streams

The revenue streams have been identified in the following categories:


[16]

� Lease rentals and maintenance charges for facilities developed within the site

� Water charges paid by users

� Effluent treatment charges paid by users

A significant portion of operating cost for the area is for O&M of common infrastructure facilities, which

cannot be recovered by charging direct user charges. The operation and maintenance cost of

common facilities such as roads, storm water drains, underground electric cables, domestic drainage

system, and green areas would be funded through contribution from the members.

A sample of the revenue stream has been presented below.

Table 6-2: Sample revenue stream

Year 2016 2017 2018 2019 2020 2021

Member

contribution

1.59

3.35

8.78

14.76

17.43

18.30

Lease rentals

25.08

53.12

140.68

238.42

252.55

267.52

Water charges

paid by users

101.92

205.25

522.70

864.16

897.55

932.57

Effluent drainage

6.42

6.42

19.26

19.26

6.42

-

Total income

(Rs. lakhs)

135

268

691

1,137

1,174

1,218

Since KSSIDC will also be a stakeholder in the whole process, it is assumed that KSSIDC would be

able to earn a revenue share of 5% to 10% (or whatever is decided at the time of the transaction).

6.3 Viability assessment

The feasibility of the project is assessed based on the estimated project cost, inflow of lease rentals,

and other operational surpluses/deficits. The overall project cash flows are evaluated against targeted

values of project IRR and equity IRR, which are in turn determined by the cost of debt, equity, and the

overall weighted average cost of capital (WACC).

We have estimated that the proposed industrial estate would begin to be occupied in Year 4, i.e.,

2016 onwards, as the first two years would be dedicated to the development of the land and, given

the low demand, occupancy will be initiated once some developments start happening on the IISc,

DRDO, ISRO, and BARC lands. Occupancy is likely to be experienced in a phased and gradual

manner. In this ‘base’ financial feasibility, total occupancy levels of 10%, 20%, 50%, 80%, and 90%

have been assumed for 2016, 2017, 2018, 2019, and 2020, respectively. By 2021, it is assumed that

the industrial estate would be fully occupied (100%).


[17]

Hence, revenues, variable costs, and capital recoveries are functions of the abovementioned ‘market

off take’ with regards to industrial, commercial, and residential spaces. Feasibility of the project would

be largely dependent on the pace at which tenants are attracted to the estate.

The results of the viability assessment have been outlined below.

Parameter Output

Project IRR 9.3%

Equity IRR 7.6%

From the above figures, it is evident that the project is unviable on a pure DBFOT model. However,

with viability gap funding (VGF) to the extent of 40% of the project cost, the project will become viable,

and the project IRR can be around 15%, while equity IRR can be around 18%.

6.4 Funding available under various schemes

The central government’s VGF mechanism allows for funding of up to 20% of the total cost for

projects that are based on the PPP mode but are otherwise financial unviable.

The state government also has a VGF mechanism that provides additional 20% of the project cost

over and above the central government’s VGF funding.

6.5 Issues for KSSIDC’s consideration

Given that the demand for industrial land is likely to be low, it might be useful for KSSIDC to market

the project as an ancillary hub for defence manufacturing due to the presence of DRDO, ISRO, IISc,

etc. DRDO is developing its testing range close to the proposed site and will definitely require support

industries around the facility.

6.6 Discussions on the report

While we have prepared the report and provided recommendations based on our assessment of the

projects, we would like to further discuss the recommendations with the C&I Department and KSSIDC

officials and factor in their suggestions and recommendations as well.


[18]

7. Regulatory and Legal Framework

7.1 Applicable laws and acts and legal cover for the project

The development of the estate would be influenced by several legislative instruments and policy

instruments.

The estate development may benefit from the following policies:

� Karnataka State SEZ Policy, 2009

� Karnataka Industrial Policy, 2009–14

� Karnataka Infrastructure Policy, 2007

� Karnataka Renewable Energy Policy

� State Millennium Biotechnology Policy, 2001

7.2 Legal and regulatory framework

The proposed industrial estate will be developed on the land acquired by KSSIDC. The mandate of

KSSIDC is to undertake following activities:

� Establishment and management of industrial estates

� Procurement and distribution of raw materials

� Marketing assistance to SSI units

� Supply of machinery under the hire purchase scheme

� Participation in exhibitions

KSSIDC now intends to set up an industrial estate on a PPP basis, which it can do under the current

framework in which it functions.

7.3 Key issues

No major issues are envisaged.


[19]

8. Indicative Environmental and Social Impacts

8.1 Environmental impacts

The environmental impacts due to the development of the industrial estate are predominantly likely to

be in terms of air, water, and noise pollution.

Air pollution would be caused by the construction of infrastructure as well as industrial units. The

development would be spread over a period of 4 to 5 years and would peak incrementally, which

would further increase the pollution load.

Water pollution is likely once the occupancy in the estate starts taking place. Once units become

active, effluent discharge will be a critical area which, if not mitigated, would lead to surface and

ground water pollution.

Noise pollution would also largely follow the occupation of the estate. In the initial years, noise

pollution would be attributable to the construction activity, and later, would be attributable to noise

emanating from the units.

8.2 Social impacts

Currently, no human settlement is observed on the land under study, and hence, no resettlement and

rehabilitation issues are foreseen.

8.3 Mitigation measures

It will be critical to undertake both an environmental impact assessment (EIA) and a social impact

assessment (SIA) before development is undertaken. These studies will clearly identify issues related

to both environment and social impact and would provide detailed mitigation measures for the same.


[20]

9. Operating Framework

9.1 Risks and mitigation

The risk framework for this project has been outlined below.

Table 9-1: Risk mitigation measures

Risk category Risk implication Mitigation measure

Sponsor risk KSSIDC scraps projects under

PPP mode

Termination payments in case of

KSSIDC scrapping projects

Environment risk Adverse impact on surrounding

environment

Penalty clauses in case of default on

concessionaire’s part

EIA to identify all risks in advance

Political risk Change in government may put

project in jeopardy

Termination payments in case of project

being scrapped

Force majeure risk Project is abandoned Force majeure clauses in the

concession agreement

Operating risk

Operations of the estate are

impacted (infrastructure service

failures etc.)

Penalty clauses for stalled operations on

account of concessionaire’s fault

Revenue risk Revenue realization is sub-par

Protection clauses for the developer in

case the revenues fall below threshold

limit (depending on the nature of project)

Demand risk Demand is low

Protection clauses for the developer in

case the demand is lower than

anticipated

Design risk Overdesign of the project

Project design to be finalized in mutual

agreement of concessionaire and

KSSIDC/SPV/appropriate agency

Completion risk Completion of project is delayed Penalty clauses for time overrun in the

concession agreement

Cost over-run risk Cost of projects are higher than

anticipated

Developer to be responsible for cost

controls; clauses for non-payment of

additional costs on account of

concessionaire’s fault


[21]

9.2 Indicative project structure

In order to make the industrial estate a success, the expertise and strengths of various stakeholders

would need to be structured effectively. Project structuring involves allocating roles and

responsibilities amongst the various stakeholders capable of executing/managing them most

efficiently. An efficient project structure also needs to give due consideration to the interests/concerns

of all stakeholders in order to have sustainable operations.

The key stakeholders in the project are:

� Government of Karnataka (GoK)

� KSSIDC

� Strategic partner

� Tenants

� Financial investors and lenders

GoK intends to further the development of the industrial infrastructure in the region and thereby boost

investments in the state.

As the nodal agency for the project, KSSIDC’s concerns are:

� Recovery of investment in the land demarcated to be transferred to the special purpose

company(ies) (SPC), which will be responsible for execution of the project

� Participate in the potential benefits of industrial estate (either through equity stake or premium

for the land)

� Development of Chellekere region

It is assumed that the key concerns of the strategic investors would be:

� Overall attractiveness of the project

� Facilitation by KSSIDC as a partner

� Long-term commitment from GoK

� Autonomy to take decisions in line with their commercial objectives

� Minimize capital at risk

Tenants, i.e., various industries, and services would be concerned about:

� Assured, good quality, and cheap infrastructure and services

� Hassle-free operating environment and a single-point interface for all infrastructure and

services

The financial investors and lenders would be concerned with risks, returns, and liquidity of

investments in the project. Specific concerns would be regarding:

� Reducing the risks in the project through commitment from KSSIDC/GoK

� Bankable revenue streams and adequate cover

� Credit enhancing mechanisms

� Reducing the execution risk by selecting promoters with a good track record

The interests and concerns of various stakeholders as identified above have been captured (as key

issues) and addressed in the following section.

9.2.1 Key issues in project structuring

The key issues, as envisaged, in structuring the industrial estate project are as follows:

� Role of the state – KSSIDC and other bodies


[22]

� Private sector partnering

� Land development and provision of services – one company or separate companies

� Services to tenants - single-point interface or multiple service providers

� Transfer of assets to SPC

9.2.1.1 Role of the state – KSSIDC and other bodies

The state government and its bodies could have multiple roles in the industrial estate project. These

roles could be one or more of the following:

� Statutory role

� Management

� Investor

� Land owner

� Facilitator between government and private players

� Developer

� Infrastructure provider (own facilities or concessions)

� Trunk infrastructure provider

� Local utility provider

Based on the private sector participation (PSP) experiences in the infrastructure sector and

development of industrial estates across the world, it is envisaged that the roles most suitable for the

state government and its bodies are as follows:

Statutory role

All roles to be performed by the government (the sovereign authority) as per the laws of the land

would need to be undertaken by the state government, e.g., maintaining law and order in the estate.

Management vis-a-vis investor

Typically, investors prefer to have representation and control of companies/projects (where

investments have been made) in order to secure their investments. The state government and its

agencies would, on the other hand, also be concerned about the economic and social outfall of the

project. Moreover, the presence of the state government or its agencies would also provide assurance

to the tenants regarding transparency of transactions and regulation of the area.

The strategic partner on the other hand would prefer management control and autonomy over

commercial decisions. However, he could benefit from a limited role of the state, i.e., that of a

facilitator. Moreover, the strategic partner is expected to provide superior marketing reach, financing

capability, and management expertise and thus a higher stake for KSSIDC would lead to the dilution

of the project on the above aspects.

Further, the implication of a high equity stake is that KSSIDC might need to commit further funds to

the project, in order to fund growth and further development.

The following table summarizes the implications of the various options before KSSIDC as an investor.

Extent of Stake Implications

100% Stake for KSSIDC

The project would be entirely under public sector control.

GoK/KSSIDC does not possess capabilities in marketing to

tenants and management of infrastructure

Large capital commitments would have to be made for the


[23]

Extent of Stake Implications

development of the project leading to fund outflow for the

government.

Tenants are likely to have less trust in the public body's ability to

deliver upon infrastructure and management.

50-100% Stake for KSSIDC

The government would retain management control, and hence,

attracting other equity investors will be difficult.

Future investments required would need to be funded by KSSIDC

to maintain majority shareholding.

Tenants are likely to have less trust in the public body's ability to

deliver upon world-class infrastructure and management.


Management control would vest with the private sector participant.

The government would have no real operational control but would

enjoy veto power in cases of special resolutions.

Future investments will need to be funded by KSSIDC to the

extent of its shareholding, but the fund requirement will be lesser

than that in previous cases.


KSSIDC would have no control on any activity of SPC. There is

only limited comfort for GoK.

0% Stake for KSSIDC

The project would be equivalent to a build-own-operate (BOO)

structure. The entire project is financed and managed by the

private sector participant.

The government would be related to the project only through a

contract.

Based on the analysis above, it is proposed that KSSIDC should hold an equity stake of around 26%-

49% in the SPC with management control given to the strategic partner. This would address the

concerns of all the stakeholders.

Facilitator

KSSIDC as a government company is well versed with the clearances and administrative procedures

involved in project execution and operations. It is thus envisaged that KSSIDC, being well positioned

in the administrative mechanism, would be an ideal body, as a facilitator, to provide such support to

the SPC formed for implementing the project.

Provider of trunk infrastructure

KSSIDC has developed industrial estates in the past and has procured trunk infrastructure like water

supply sources, trunk water supply lines, and trunk linkage roads. Efficient provision of such

infrastructure is crucial for the development of the industrial estate, more so since it is beyond the

scope and control of the SPC implementing the project. Currently, most trunk infrastructure services


[24]

are operated and managed by state government agencies. It is thus envisaged that KSSIDC and the

state government would help in assuring efficient provision of trunk infrastructure to the SPC for the

project.

9.2.1.2 Services to tenants - Single-point interface or multiple service providers

The SPC implementing the project might not have the capability to provide all the infrastructure and

services efficiently, i.e., assured and cheap infrastructure services. Thus, the SPC might subcontract

or outsource certain service and have back-to-back arrangements with other service providers.

However, tenants would require a hassle-free single-point interface for all infrastructure and services,

which takes care of all their needs and thus enables them to focus on their core business activities.

Thus, from the tenants' viewpoint, it is desirable that the SPC be responsible for aggregating all

infrastructure services.

9.2.2 Recommended project structure

Based on the key takeaways from the above analysis, we recommend that KSSIDC should become a

strategic stakeholder in the SPC with a 26% stake. The land being provided by KSSIDC would

substitute the equity requirements for participation in the SPC.

The SPC will be the sole agency responsible for providing both serviced land and infrastructure

services to the tenants in the industrial estate.

Figure 9-1: Recommended structure for the industrial estate

Strategic Partner KSSIDC

Special Purpose

Company

Tenants

Service

Arrangements

74% 26%

Development

Rights

Land


10. Way Ahead

10.1 Project development

In order to kick-start the development of the

advisor (TA) who will conduct a detailed techno

commercial as well as technical aspects of development and would lay

proposed transaction. The TA will also prepare the bid documents for the selection of a private

developer and manage the bid process.

Figure 10-1: Project development framework

Appointment of

Transaction Advisor


evelopment framework

the development of the industrial estate, KSSIDC should appoint a transaction

advisor (TA) who will conduct a detailed techno-economic feasibility analysis. The

commercial as well as technical aspects of development and would lay out the framework for the


e bid process.

: Project development framework for KSSIDC industrial estate

Preparatoin of

detailed techno-

economic feasibility

Appointment of

Developer

[25]

KSSIDC should appoint a transaction

. The analysis will cover

out the framework for the


Preparation of bid

documents

Bid process

management

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[aa]

Disclaimer

CRISIL Risk and Infrastructure Solutions Limited (CRIS) has taken due care and caution in preparation of this Report for

Commerce and Industries Department, Government of Karnataka. This Report is based on the information / documents

provided by the government agencies and/or information available publicly and/or obtained by CRIS from sources, which it

considers reliable. CRIS does not guarantee the accuracy, adequacy or completeness of the information / documents / Report

and is not responsible for any errors or omissions, or for the results obtained from the use of the same. The Report and results

stated therein are subject to change. CRIS especially states that it has no financial liability whatsoever to the Company / users

of this Report. This Report is strictly confidential and should not be reproduced or redistributed or communicated directly or

indirectly in any form or published or copied in whole or in part, especially outside India, for any purpose.

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About CRISIL Infrastructure Advisory

CRISIL Infrastructure Advisory is a division of

CRISIL Risk and Infrastructure Solutions

Limited, a 100% subsidiary of CRISIL Limited

India’s leading Ratings, Research, Risk and

Policy Advisory Company.

CRISIL Infrastructure Advisory is India’s

premier advisor focusing on policy issues, as

well as commercial and contractual issues in

the areas of transport, energy and urban

infrastructure. We also provide support to

international firms planning investments in

India. Over a period of time, CRISIL

Infrastructure Advisory has built a unique

position for itself in these domains and is

considered the preferred consultant by

governments, multilateral agencies and private

sector clients. We have extended our

operations beyond India and are present in

other emerging markets in Africa, Middle East

and South Asia.

IL Infrastructure Advisory

CRISIL Infrastructure Advisory is a division of

CRISIL Risk and Infrastructure Solutions

Limited, a 100% subsidiary of CRISIL Limited –

India’s leading Ratings, Research, Risk and

dvisory is India’s

premier advisor focusing on policy issues, as

well as commercial and contractual issues in

the areas of transport, energy and urban

infrastructure. We also provide support to

international firms planning investments in

od of time, CRISIL

Infrastructure Advisory has built a unique

position for itself in these domains and is

considered the preferred consultant by

governments, multilateral agencies and private-

sector clients. We have extended our

are present in

other emerging markets in Africa, Middle East

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